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Recent Tariff Proposals are Bad Policy

In January the administration announced tariff hikes on solar panels and washing machines. yesterday tariff increases were proposed for steel and aluminum.

The proposals are designed to increase domestic production and jobs in these sectors--both for existing companies and potentially inducing foreign companies to set up production facilities here.

What could be bad about this?

It is helpful for the first order impacts to think of producers and users. The producers are likely to see some gains in jobs and production, The users are likely to see increases in prices. The price increases will lead them to buy less of the product, therefore reducing demand or have less money to spend on other goods and services.

In each of these industries users outnumber producers by a very large amount. For example, in steel there are about 140,000 industry jobs and 6.5 million jobs in major industries that use steel such as autos, packaging and construction.

So lots of industries and consumers will be hurt a little and a few producers will gain production and jobs. The tariff is like a tax increase where many pay and few receive the benefit.

The second order impacts are much worse and all negative,

First, there may be retaliation in the form of higher tariffs on American goods. The two most named now are agriculture and heavy machinery. Apparently the President thinks no one will retaliate--that has not been the history of world trade

Third, trade wars are not generally considered the best policy for building collaboration to, for example, fight terrorism (how is punishing South Korea going to make it easier to deal with North Korea). deal with climate change or in general contribute to trust among allies.

California and the Bay Area are major users and small if at all producers of these products so the policies are especially bad for our state.

The debate on steel and aluminum tariffs is still open and the President often says things he does not follow through with.

So perhaps with strong support from industry and Republicans (the politics of this are interesting!!) the proposed tariff increases will not happen.